Ghost Bites (Hudaco | DRDGOLD | Implats | MTN | Sanlam | Sygnia | Thungela)

DRDGOLD manages to stay positive

HEPS is up, despite many reasons why it shouldn’t have been

DRDGOLD tends to offer leveraged exposure to the gold price, as the tailings model is much lower margin than getting the yellow stuff out of the ground for the first time. This means that small changes in the gold price can drive significant changes in profits, both positively and negatively.

For the six months to December 2022, HEPS is expected to be between 2.6% and 17.4% higher, an impressive outcome considering the operating environment.

Revenue only increased by 6%, with the increase in the rand gold price offset to some extent by a decrease in gold sold. Volume throughput fell at both major operations, impacted by load shedding, the weather and other issues.

Cash operating costs increased by 10% in this inflationary environment, so operating margins deteriorated. In absolute terms, revenue was up by R155.8 million and operating costs increased by R159.3 million.

So, how did HEPS increase? Considering that there is no debt on the balance sheet and wasn’t any at the end of the comparative period either, investors will need to scrutinise this carefully when detailed results are released on 15 February.

Hudaco: hello, operating leverage

It’s a beautiful thing when it works in the right direction

I often write about operating leverage. Simply, this is the impact of fixed costs in a business. In good times when revenue is growing strongly, those fixed costs tend to only increase by inflation (and sometimes less). The net effect is margin expansion, where a percentage increase in revenue is “leveraged” up into a larger percentage change in operating profit.

This is why a 12.3% increase in revenue at Hudaco for the year ended November has driven a 23.4% jump in operating profit before fair value adjustments. Before you get worried about whether the story goes wrong further down the income statement, you’ll be pleased to know that HEPS was 22.3% higher.

The cash has followed the earnings, with the dividend per share up by 21.7%. It’s a textbook outcome for shareholders.

This isn’t just a recovery to pre-Covid levels, either. Compared to 2019, HEPS is up 48%. This is a lovely through-the-cycle performance for this industrial company.

Hudaco only closed 1.9% higher at R158 per share. HEPS of R20.07 means that you can buy Hudaco on a Price/Earnings multiple of 7.9x. Things can go wrong for these companies, so be cautious. The share price is only up 3% in total over the past 5 years. Operating an industrial group in South Africa is no joke.

I must give absolute credit to Hudaco here – they don’t mince their words when it comes to how government is destroying our economy:

Implats’ flat result is impressive in these conditions

At a time when many mining houses are struggling, Implats is demonstrating resilience

Before we delve into the details, it’s important to remember that this update covers the six months to December. Given the impact of load shedding towards the year, that’s not directly comparable to the quarterly production updates that we’ve seen from other mining houses. Still, Implats has done well here.

EBITDA for the period is in line with the comparable period at R24.5 billion.

This was achieved despite a drop in group refined production of 9% due to a reduction in smelting capacity during the period. This negative impact of maintenance and load shedding was mostly offset by destocking of refined inventory, so sales volumes only declined by 2%.

Thanks to a positive net impact from the rand price of PGMs, there was a 5% increase in group sales revenue. With solid cost management, this explains how the flat EBITDA result was achieved.

From a cash flow perspective though, investors should note that capital expenditure is significantly higher at R5 billion vs. R3.6 billion in the comparative period.

The group seems to be in a solid financial position as it continues its battle against Northam Platinum to get control of Royal Bafokeng Platinum.

Look for money elsewhere, Ghana

The tax assessment against MTN Ghana has been fully withdrawn

When governments get desperate, they do silly things. Ghana has defaulted on its foreign debt and is in talks with the IMF to restructure its debt. The tax assessment issued against MTN Ghana was quite clearly at attempt to shake the corporate tree to see whether any money falls out of it.

Thankfully, sanity has prevailed. The enormous assessment of $665 million has been fully withdrawn. I have no doubt that some very sensitive meetings happened in the background to achieve this outcome.

Although this is clearly good news for MTN, the share price still closed slightly lower. MTN is up 13% this year and I’ve opted to close my position, as the combination of load shedding in South Africa and foreign exchange availability in countries like Nigeria means that MTN just isn’t appealing enough this year.

Sanlam invests further into retail life insurance in SA

There are two separate deals worth R1.1 billion in total

Sanlam clearly still sees opportunities in South Africa, choosing to deploy a substantial amount of capital into two transactions that will strengthen its retail life insurance operations in South Africa. Sanlam has operations in many countries already, so this is genuinely a choice to invest capital in South Africa.

The first deal is to combine the business of Sanlam Trust with Capital Legacy, with the net result of Sanlam owning 26% in the enlarged Capital Legacy Group. In addition to the obvious benefits of scale, Sanlam will capture extra profit share on business written for its own clients and will be the provider of reinsurance services to Capital Legacy in future. It’s worth noting that African Rainbow Capital Financial Services Investments currently holds 29% in Capital Legacy, a stake that will reduce to 25% post this transaction. This means that Sanlam and Capital Legacy already have a B-BBEE partner in common.

The second deal is to buy out the minorities in BrightRock, taking Sanlam’s stake from 62% to 100%. There is a significant earn-out structure in place, based on new business targets being met. BrightRock has delivered returns well ahead of Sanlam’s hurdle rate (minimum required rate of return) since Sanlam invested in the business in 2017.

Sanlam is a massive operation with a market cap of R131 billion, so these are small deals in the group context. This is a classic example of a “bolt-on acquisition” strategy that uses relatively low risk deals to supplement organic growth in the group.

Guess who’s back? Back again?

Magda’s back!

A few eyebrows were raised on Twitter when the news broke of David Hufton’s resignation from the CEO role at Sygnia. After more than 30 years in the industry, he’s apparently decided to take a career break. Financial freedom is a beautiful thing, isn’t it?

This means that Magda Wierzycka is back as CEO. For founders of businesses, succession is one of the hardest things to achieve. The announcement doesn’t indicate how long this arrangement will continue for.

Professor Haroon Bhorat has been appointed as independent non-executive chairman of the company, having previous served as chairman from 2015 to 2021.

The share price closed 3.6% higher on the day.

Thungela isn’t sitting around as a cash cow

Management has global ambitions, for better or worse

There are many wise investors in the market who get nervous when mining companies start doing major deals. When the cash pile is large, investors ideally want to see dividends, not transactions at the top of the cycle. Thungela is insisting on a diversification strategy, so investors will have to decide whether they are coming along for the ride.

The deal is to acquire a controlling interest in the Ensham business in Australia, an established coal operation in Queensland, Australia. Producing high quality thermal coal, the life of mine is all the way out to 2039.

The mining method is similar to Thungela’s existing operations in South Africa and makes use of rail infrastructure to take the product to port. The cool thing about Australia is that the trains actually work.

Thungela believes that the payback period of the deal is as short as two to three years. Of course, it’s intensely difficult to predict supply and demand dynamics of commodities.

Thungela’s co-investors in the project include a Swiss investment group and a private company in Australia that specialises in mining investments.

The deal is structured as an A$267 million equity investment by Thungela and an A$68 million mezzanine loan to the co-investors. The total ticket size for Thungela is thus A$335 million, or around R4 billion.

This is a Category 2 transaction, as Thungela’s market cap is R31.5 billion and thus the deal isn’t large enough to be classified as a Category 1 transaction. The difference is substantial, as Thungela’s shareholders won’t be asked to vote on this deal.

The share price closed slightly higher for the day, although it did dip initially.

Little Bites:

• Steinhoff shareholders will have to wait longer for clarity, as the circular and AGM notice have been delayed while Steinhoff seeks regulatory confirmations. The AGM was scheduled for 16 March and no new date has been given.

• Spear REIT has completed the disposal of 15 on Orange for R246 million. Spear therefore has no remaining exposure to the hospitality sub-sector. The group’s loan-to-value ratio has been reduced by 335 basis points to 36.8%. This is below the group target of 38% to 43%, but the group is being prudent at the moment given where we are in the debt cycle. That’s probably a smart move.

INVEST IN SHARES